Man imposes his laws upon man. James Madison tells us that laws should not be overly voluminous or overly incoherent. Good luck on that score. I used to carry around the written U.S. tax code in law school for our tax class. I figured carrying around the tax code was good enough such that I did not feel compelled to take any other exercise. That was back before laptops when law codes were written on heavy papyrus rolls.

Under contract law an unplanned event is sometimes called an ‘act of God.’ An act of God or what is also called a ‘force majeure event’ is a situation beyond the control of the parties to a negotiated contract. The act of God may prevent completion of the contract. And importantly, an act of God may be grounds for cancellation of the contract. An act of God clause is the adult business version of the dog ate my homework.

How should an unplanned event be written into terms of the contract? In contract writing an event that is not a part of the contract obligation but affects the ability to complete the agreement is a so-called an act of God. Such clauses are a man-made road map showing what to do because of an unplanned event. This type of clause is a little bit like putting the genie back in the bottle after it has been out on the town partying too much. One can find act of God clauses in general sale contracts, livestock purchase agreements, wind energy agreements, right-of-way agreements, easements, oil and gas leases and general construction contracts.

What are these contract-written “events” which will excuse a party from completing a contact? There are as many possible act of God events as man can devise in his mischievous little mind. An act of God event is simply whatever the agreed upon contract says it is. This is man-made law. Here is an example of an actual act of God term in a contract: “The term ‘force majeure’ shall be Acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, blockades, riots, epidemics, lightning, earthquakes, explosions, accidents or repairs to machinery or pipes, delays of carriers, inability to obtain materials or rights of way on reasonable terms, acts of public authorities, or any other causes. . . not within the control of the [contracting party] and which by the exercise of due diligence [the contracting party] is unable to overcome.” Looking at this long contract clause, I will provide the reader with a few comments. First, it is written by someone rushing a bunch of ideas into a single clause. It is too broad and shot-gunny. The clause is not clearly understandable and needs focus. And this contract clause was written by a lawyer who has not thought about or experienced a tornado, flood or a debilitating blizzard.

No question. An act of God clause is one of several underappreciated stepsisters (that’s an East River expression) when parties and their attorneys are drafting a contract. Usually contracting parties give attention to ‘The Money’ or to the conditions of contract performance, not realizing that an act of God event can cause equal if not greater trouble for the parties in the future. How quickly money throws one off the scent. It’s the old story of greed outstripping prudence. The scope of an act of God clause depends on the type of contact, so pay attention my honorable readers. Do not avoid common sense in the early stages when negotiating and drafting any agreement. Otherwise an uninsured accident is just over the next hill. An act of God is a peril outside of man’s control, so the extent to which it can be provided for in a contract, all the better.

An act of God has been defined in South Dakota as “any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected, could have been prevented” While the definition of act of God is broad enough to cover any number of events courts have developed patterns of rulings to establish what are not acts of God. Economic downturns have not recognized by courts in many states as acts of God. Determining whether a pandemic or viral outbreak may be an act of God may depend on defined ‘events’ which excuse obligations under the written terms of an agreement or contract. A meatpacking plant overrun by the virus may qualify as an act of God which excuses performance. An act of God is not defined in black and white law. Such is the existence of man.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

I provide the reader with an opinion piece discussing legal problems the business and ag world now face. I have seen this rodeo before. I have ridden the bronco. It hurts when you fall.  (I prefer falling off of a motorcycle — the drop is less severe).

Don’t kid yourself. Don’t act like the coronavirus effect on the region’s economy is something that will just pass. Yes, it will pass. But it will take a damn long time to pass. Further, this will be a depression, and one not known by history because of the intricate modern phenomenon of government regulations which are indelibly integrated into every aspect of the business and agricultural world.

Those of you old enough will remember how long it took to get out of the 1980s ag recession. I have seen and worked in two recessions in my career — and this one is bigger and quite distinct from either of those. Start now to plan. Start now to deal with the complicated financial problems in the ag and ranch world. They are here.

A modern economy is not simple. It is an admixture of market stupidity, unresponsive government programs, bad banking regulations and management, and overall misjudgments by most everyone. Government won’t bail out the problem. Government might help some, but it is not the remedy. Government can’t foresee, can’t plan, can’t address and can’t correctly manage.

I know, I have also worked for government.

So let’s start our review. Consider that when I use the term ‘business’ it means those in business whether ranchers, farmers, suppliers, service providers, manufacturers, banks and financial institutions. All of these I have represented in my career. When I taught bankruptcy law, I used a medical analogy:  I told the aspiring legal scholars that a bankruptcy filing is akin to surgery. Surgery should always be treated as the last option.

In the medical field, a reasonable first option might be an antibiotic. Here, the antibiotic is a “workout” or a “turnaround,” each of which are bankruptcy alternatives. These alternatives have value and should be attempted by both creditors and debtors as a viable option, not just a throwaway line. I have successfully represented debtors and creditors in turnarounds and workouts. Resolving “stressed-business” issues out of court makes sense when the option is there.

Financial restructuring and workouts involve working closely with a business’s creditors to create, or “workout” plan (often a written contract) to restructure business debts while allowing the business to remain viable. This process allows the business entity to negotiate its debts in a way that retains profitability without involving the court system. This is not as difficult as it might sound — creditors often share the same objective of returning a financially stressed business to good financial health in order to ensure their debts are paid.

A “turnaround” is a separate process from a workout. It may also use the availability of restructuring and workouts, but a turnaround has several other components. A turnaround will generally restructure operational aspects of the business. This may be the solution when the problem lies deeper in the company than lack of cash flow. Where a creditor will not restructure the debts owed to it, a turnaround will be utilized to find alternative financing or new ownership.

Another possibility in a turnaround is the sale of ownership or a portion of ownership, which can provide liquidity at the expense of a change of control of the business.

If the company’s goal is to continue in business, particularly under current ownership, then a creditor or a lender workout should be considered. If new ownership, or a sale of the business in whole or in part, is an acceptable outcome so long as the business is preserved as a going concern, a turnaround can be considered as well.

The process of financial restructuring and negotiating a workout with business creditors is something that should be considered to avoid the expenses and bureaucracy related to a bankruptcy proceeding. The Chapter 11 bankruptcy reorganization process is expensive and time-consuming. The goal of business turnarounds or financial restructuring is to provide a cost effective approach by way of a ‘non judicial/non bankruptcy’ business reorganization, to restructure business debts. 

Courtship and finances have something in common:  timing is everything. When a business is in a stressed situation, neither the business nor its creditors should go in stand-by mode. Negotiations should begin immediately. In both the workout and turnaround, all parties must agree to the terms; both are matters of serious negotiation to be done with all deliberate speed.

Bankruptcy proceedings are not the only way to save a business — sometimes a well-prescribed antibiotic can halt the damage and let the healing begin.

David Ganje practices law in the area of natural resources, environmental and commercial law with Ganje Law Office. His website is Lexenergy.net.

David L Ganje
Ganje Law Offices
Web: lexenergy.net

605 385 0330

davidganje@ganjelaw.com